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Brazil debates economic cost of corruption investigation

Mon, Mar 28, 2016 - 11:20 AM

[RIO DE JANEIRO] Brazil's former president Luiz Inacio Lula da Silva is raising hackles after warning that the mega Petrobras corruption probe is paralyzing essential sectors of the Brazilian economy, like oil and construction.

Many saw Lula's comments as a cynical attempt to deflect public attention from a two-year-old investigation, now that he has been implicated in the widening corruption scandal.

But the issue he touched on, invoking the IMF as an authority, is at the center of a growing debate among analysts and economists.

At a meeting with union organizers in Sao Paulo on Wednesday, the former machinist said the probe was necessary but asked "whether it's not possible to combat corruption without closing companies... and without causing unemployment."

"When this is all over, there could be a lot of people in jail, but there could also be millions of unemployed," he said.

The IMF in January projected that the Brazilian economy would shrink by 3.5 per cent this year, 2.5 percentage points more than its previous estimate. In 2015, the Brazilian economy sank 3.8 per cent.

According to GO Associados consultancy, the corruption probe has reduced Brazil's GDP by about 3.6 percentage points, taking into account direct and indirect effects as well as the incomes of hundreds of thousands of employees.

Unemployment, meanwhile, has continued to climb, rising to 8.2 per cent in February compared to 5.8 per cent a year earlier.

Maurice Obstfeld, the IMF's chief economist, attributed the worsening outlook to the "political configuration" of Brazil, with the "initiation of impeachment proceedings (against current President Dilma Rousseff) and the increasing scope of corruption allegations."

These factors, he said, "have undermined confidence, as has the continued deterioration of the fiscal outlook."

Reaction to Mr Lula's statements has been swift.

Antonio Cesar Bochenek, the president of the Association of Federal Judges of Brazil, said the corruption probe "has done no damage... and has allowed for the recovery of three billion reais (US$800 million), as well as goods and property."

For Jose Robalinho Cavalcanti, president of the National Association of Attorneys of the Republic, "Lula does himself a disfavor with such declarations because... he was in charge of running the country and knows very well that the economic situation is formed much more by economic policy than any investigation."

Brazil has been rocked by allegations that construction companies colluded to overbill state oil giant Petrobras by billions of dollars, bribing corrupt executives and politicians to look the other way.

About a hundred people, from Petrobras executives to owners of Brazil's largest construction companies, have already been convicted.

Since then, "the banking system has suspended credit to the implicated companies and other associated companies," said Gesner Oliveira, president of the Administrative Council of Economic Defense (CADE).

According to a January report by IstoE magazine, Petrobras suspended payments in projects suspected of being part of the corruption, affecting 12,000 refinery operators and shipyards. Deliveries have been halted or delayed at major projects.

But that's not a reason to allow corruption, Mr Oliveira told AFP.

"The fight against corruption is a priority, but its effects can be mitigated," he said.

His organization has proposed punishing corrupt companies but not excluding them from participating from public tenders.

What's most important, Mr Oliveira said, is to improve oversight of both public and private sectors to ensure this type of graft "does not happen again."